How to Save Taxes by Claiming Casualty Loss Deductions After a Disaster

Example of How You Can Save on Taxes

Imagine your vacation home is damaged by flooding in 2025, and your insurance does not cover $80,000 of the loss. Because the flood was part of a federally declared disaster, you can deduct part of that loss on your tax return.

Here is how the deduction works, first, you reduce the loss by $100, which leaves $79,900. Then you subtract 10 percent of your adjusted gross income, or AGI, which is $25,000 if your AGI is $250,000. That means your deductible loss is $54,900.

If you are in the 32 percent tax bracket, that deduction could lower your taxes by about $17,500. That is real savings from a loss that would otherwise be purely out of pocket.

What Counts as a Casualty Loss

A casualty loss is when your property is damaged, destroyed, or stolen by a sudden and unexpected event, such as a fire, flood, earthquake, or theft. To qualify for a personal deduction, the loss must be from a federally declared disaster for the years 2018 through 2025.

Starting in 2026, the One Big Beautiful Bill Act (OBBBA) expands this rule so that state-declared disasters also qualify. This means if your state’s governor declares a disaster, your losses may be deductible even if the president does not issue a federal declaration.

How the Deduction Is Reduced

Even if your loss qualifies, you must subtract two amounts before you can claim it. First, reduce your loss by $100 for each event. Second, reduce it by 10 percent of your AGI. These two reductions often eliminate smaller claims, so this deduction mainly helps with larger uninsured losses.

When Insurance Pays More Than the Property Was Worth

Sometimes insurance pays you more than what you originally paid for the property. That creates a personal casualty gain. You can use any personal casualty losses, even from unrelated events, to offset that gain. If your gains still exceed your losses, the extra amount is treated as a capital gain and taxed as investment income.

Special Rule That Lets You Deduct a Federal Disaster Loss Early

If your loss is from a federally declared disaster, you can choose to deduct it in the year before it happened. This can produce a larger tax refund if your prior year’s income was lower.

For example, say you had a large uninsured loss in 2025, but your income was much lower in 2024. You can amend your 2024 return to claim the deduction there, where it reduces your AGI and taxes more effectively. This rule does not apply to state-declared disasters, at least for now.

How Business Losses Are Treated

If your loss involves business or rental property, the rules are much better. You can deduct the entire uninsured loss without the $100 or 10 percent AGI limits. You also do not need a disaster declaration at all.

If the loss occurred in a federally declared disaster area, you can still use the timing option to take the deduction in the prior year if that gives you a bigger benefit.

Key Points to Remember

1. For 2018 through 2025, only losses from federally declared disasters qualify for deduction.

2. Starting in 2026, state-declared disasters will also qualify.

3. You must reduce your loss by $100 and then by 10 percent of your AGI.

4. You can always use losses to offset insurance gains.

5. Business losses are fully deductible without limits.

6. Federal disaster losses can be deducted in either the year of the loss or the prior year, whichever saves more tax.

In Simple Terms

You can save taxes by deducting uninsured losses from disasters. If your property is damaged or stolen during a federally or state-declared disaster, and insurance does not fully cover it, you can itemize the loss on your return. This turns part of your financial setback into a valuable tax benefit.